Price falls less steep, but markets still jittery

The financial markets continued in turmoil this past week, with equity prices down on balance and bond prices up virtually everywhere. Following in the footsteps of a number of European central banks, the Bank of Japan has now moved to negative interest rates.

The mood in the equity markets may be dominated by broader sentiment, but company results occasionally also drive pricing. Ben Steinebach Head of Investment Strategy

There have been wild swings and roundabouts in the leading equity markets in the past week, with investors seeking out safe-haven bond markets a little more than they had the week before. By contrast, then, bond markets saw prices go up and yields depressed further – all of which is a clear sign that financial market nervousness isn’t over just yet. In the week starting 18 January it had been the bond markets of the really robust European economies (which include Germany and the Netherlands) that saw interest rates slide, whereas last week France, Spain and Italy joined them and lost over five 5 basis points. Investors are clearly looking for safety on a much broader front.

Fundamental factors didn’t come into play much – neither macroeconomic nor company results – even if macroeconomic data was rather variable both in the United States and in Europe. In the United States, figures released on the labour market, housing market and consumer confidence were generally positive, whereas anything related to energy showed up negative. December’s durable goods orders were a case in point, recording a 5.1% decline on November. Mainly to blame were the always volatile orders for transport equipment, although energy sector investment was also a detractor. In Europe, less encouraging data included Germany’s IFO reading for business confidence as well as the Economic Sentiment Index. Both confounded expectations by falling, and this probably had a lot to do with the nervous sentiment in the equity markets.

Bank of Japan introduces negative key rate

A variety of central banks put their marks on the week that was. The US Federal Reserve hinted in a press release that it is unlikely to further raise its key Fed funds rate anytime soon. A hike at the FOMC meeting in June now seems more likely, followed by increments in September and December.

The US economy isn’t doing badly but shows pockets of weakness in the energy sector and in industry. Also, the Fed is keeping a beadier eye than usual on international developments when deciding its monetary policies. The Bank of Japan (BoJ) has moved to negative rates on deposits the country’s banks hold with their central bank, introducing a staggered system that entails rates staying the same for the average amount held in 2015 but with any excess governed by the new rate of -0.1%. This way, the BoJ hopes to tempt the banks to lend more to the private sector.

Results season in full swing

The mood in the equity markets may be dominated by broader sentiment, but company results occasionally also drive pricing. In the Netherlands, Philips released its annual results and Royal Dutch shareholders agreed to the takeover of British Gas. In this past week, a record number of companies published their results for the final three months of 2015.

In the United States, Boeing disappointed with plunging net income, cutting production rates for its 747s and toning down its full 2016 forward guidance. Apple’s profits were likewise less than encouraging: iPhones sales in the United States and Japan are easing off and other devices aren’t picking up the slack. Microsoft, by contrast, presented excellent figures and is doing well in the cloud business, as runner-up to Amazon. Windows 10 is a success and the company is raking in major sales of its Office packages to corporations. Microsoft shares rose by 4% after its results release. VISA also reported decent figures, with earnings per share ending up at USD 0.69 compared with the USD 0.68 expected in the markets.

In the Netherlands, Royal Dutch benefited from the uptick in oil prices. Rumour has it that Saudi-Arabia and Russia have joined forces to try and get prices back up. Meanwhile, Royal Dutch shareholders agreed to the takeover of British Gas. Philips reported better quarterly numbers than had been expected: sales up 2% to EUR 24.2 billion and a 60% surge in net income to EUR 659 million. The Dutch electronics giant also noted an improvement in its order intake from China, and was rewarded with a share price uptick of over 6%. In a week of net price losses for most equity markets across the world, the AEX ended Thursday 0.2% higher than the previous Friday, at 420.1 points. This morning, the index was fluctuating around 425 points on improved sentiment over a further upturn in oil prices to over USD 34 a barrel (Brent).

Coming up next week: a slew of corporate results; US employment figures

From Monday, we’re in for a busy week in terms of both corporate results releases and macroeconomic data, reaching its climax with the publication of US employment figures for January.

In the macroeconomic arena, all eyes are peeled for the release of purchasing managers’ sentiment in both manufacturing and services in a great many countries, although these are final numbers that aren’t expected to deviate much from the provisional ones released last week. The United States will report new data on consumer and income trends in December as well as construction spending in the same month. Slated for release in the European Union are the latest data on unemployment, retail sales and producer prices in December. Market watchers will be very interested in German factory orders, and more specifically in their breakdown into domestic and foreign orders. Italy is due to take its turn with the latest on inflation and employment. And on Friday afternoon the Americans will put the icing on the week’s cake by revealing their January joblessness and employment growth numbers.

The week ahead should see a plethora of companies report their results for the final quarter of 2015. In health care these include Pfizer, Gilead Sciences, GlaxoSmithKline, Merck and Astra Zeneca. Other interesting players on the roster are General Motors, British Petroleum, Exxon Mobil, Dow Chemical, LVMH, Daimler, Alphabet (Google’s new parent company), Vodafone and banks BBVA, BNP Paribas and Credit Suisse. In the Netherlands, we are eagerly expecting the news from ING, Royal Dutch, KPN, Sligro and property funds Wereldhave and Unibail Rodamco.

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Ben Steinebach

Head of Investment Strategy

Ben Steinebach graduated with a degree in General Economics, specialising in macroeconomics, international economic affairs and public finance. He held various positions in the financial industry before joining MeesPierson in 1999. Ben has been Head of Investment Strategy at ABN AMRO since 2010.